VUL options

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matthewsjl
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VUL options

Post by matthewsjl »

OK - I know this forum is geared towards fund advice but I'd be interested in opinions on the following.

About 9 months ago, we (wife and myself) purchased VULs through a well known financial 'planning' organization (proposed by advisor). Something in the last couple of days prompted me to look at the fees that we pay up front on every premium - I was a little shocked when I discovered it was 5%. It clearly states this in the facts/figures section of the policy but my wife and I don't remember this being specifically mentioned - just the projections. The advisor was a friend and we were probably a little too trusting. That's our failing that we recognize.

So, we're about 9 months in and have paid in about 5k each per policy ($800/month) so far (for a total of $10k). If we surrender, we lose the lot as far as I can tell. I'm not adverse to ditching but it would sting a little bit from the experience. The surrender charge for years 1-5 is about $8300 per policy.

As far as I can understand, the fees we contribute yearly are about $550/year each (total $1100) - that would make it 9 years to recover the 'experience', less with compound gains. Another contributing factor is the funds in the VUL appear to be underperforming... which may make the recovery period less.

Of course, if we ditch, we'll still be looking for life insurance but would look at the options available.

I realize that this could be an expensive learning experience. I ordered the Bogleheads book today and have taken a personal decision to not be misled in the future and to have a more active role in my financial management.

Thanks in advance for opinions,

John.
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LH2004
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Post by LH2004 »

What's the current cash value?

Are you sure about the surrender charge? It's most often a percentage of cash value, but maybe a minimum would apply where the cash values are tiny (yes, I realize that this "tiny" amount would still be painful to forfeit).

Are you paying the minimum premium needed to keep the policy in force?

Are those fee numbers you're quoting ($550/year) including the premium charge?
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matthewsjl
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Post by matthewsjl »

The current cash value as $0 - the policy has value but if cashed the surrender charge kicks in and wipes out the cash invested.

The surrender charge for years 1-5 is stated as $8330. Current investment is $5k roughly.

The fees per month are 5% - we are maxing at the moment and contribting about $800/month. Fees are about $45/month on that $800. The insurance policy part is also coming out of that $800 at $77/month.

The minimum 'no-lapse' for five years would be $370/month. I need to find out if this can be lowered (it's unclear from the paperwork I have to hand).

Both my wife and I have a policy - so effectively double the above numbers for our totals right now.

Cheers,

John.
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MossySF
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Post by MossySF »

If you really are paying only 5% in "fees", you got a great deal for a VUL. Most people who complain about getting suckered into a VUL policy discover they are paying 15%+ in fees and commissions. I'd look over the prospectus carefully and itemize every fee that is not specifically for the cost of insurance.

Other than paying the surrender fees, the other option is to put even more money in. If most of the fees are fixed amounts and not based on your premium contributions, you can reduce the fee % by putting even more money in.

But the underlying fund options is really the key. If you don't have good options for the money to grow, fee reduction and tax-deferral doesn't do any good.
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Post by Dale_G »

Unfortunately John, there is probably no "break-even" period for these policies compared to the cost of term insurance + investment of the difference in low cost taxable funds.

Two lessons you've already learned:

1. Never buy insurance and investments in one vehicle
2. Drink beer with friends, but don't buy anything from them.

My advice: Buy whatever term you really need, recover whatever you can from these policies - and step carefully in the future.

Dale
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LH2004
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Post by LH2004 »

matthewsjl wrote:The current cash value as $0 - the policy has value but if cashed the surrender charge kicks in and wipes out the cash invested.
"Cash value" means the account value, not reduced by the surrender charge. What's yours?

I understand you're paying 5% as a premium charge. What other expenses are you paying?
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matthewsjl
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Post by matthewsjl »

OK - the listed value of the policy is approximately $5k. On my statements, I just see an 'Ending Value' for the policy (the $5k). This is immediately followed by a 'Charge if surrendered' line which negates the $5k. And, the next line states: Value if surrendered: $0.00.

Sorry if that doesn't address what you're looking for in my answer. I'm learning how to read the statements and interpret them.

On my premium statement, all I see is a 'Premium Expense Charge' line at 5% of the total premium paid. Then I have multiple lines of various funds purchased. The units * price per line matches the total and the sum of the fund purchases matches the premium less the 5% charge. So, if there are extra charges, they're well hidden.

Cheers,

John.
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Dale_G
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Post by Dale_G »

Well someday the line "value if surrendered" will be a positive number - but just when is another question.

Not directly disclosed are the fees of the underlying funds - probably amounting to 1.5% +/-.

You are definitely on the right track here John.

Dale
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mephistophles
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JOHN RE: VUL

Post by mephistophles »

Hi John,

As you stated, you have learned an expensive lesson. You should have been presented with and read the prospectus before buying the policy. You will find that there are numerous expenses which are broken down into two broad categories. The first group has to do with front loads, back loads, mortality costs, administrative expenses, M&E charges and others. The second group of expenses has is at the sub-account level (the investment portion.) The total of all these expenses typically exceed 40% of each year's basic premium. VUL makes absolutely no sense as an investment vehicle nor as a life insurance protection vehicle for these and other reasons.

Generally if you quit in the first year or two you will lose all, or virtually all, of your premium. Staying with the product is just throwing good money after bad. The only way you can benefit from this product is by dying fairly soon, so if you are in good health apply for new term insurance. After it is issued discontinue paying premiumiums on your VUL. Call the home office service number to see if there is any cash surrender value. If there is no cash value or it is small the best thing to do is just quit paying premiums, but "do not formally surrender the policy." Even with no cash surrender value these types of policies sometimes stay inforce for months or even a few years as you did not surrender it and occur the surrender charge.

Good luck,

ole meph
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matthewsjl
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Re: JOHN RE: VUL

Post by matthewsjl »

mephistophles wrote:As you stated, you have learned an expensive lesson.
Yes, expensive. However, this was a long term investment decision and I now personally feel that not getting out now could be even more expensive over the long term (20+ years).
You should have been presented with and read the prospectus before buying the policy.
We were presented with the prospectus - but placed a little too much trust elsewhere (friend and paid for advice). A VUL had other reasons that it was attractive to us - from an inheritance perspective. What I'm realizing now, is that *if* a VUL was the right answer... the one sold was probably not either the best value or best performing. That is the thing that bugs me the most.
You will find that there are numerous expenses which are broken down into two broad categories. The first group has to do with front loads, back loads, mortality costs, administrative expenses, M&E charges and others. The second group of expenses has is at the sub-account level (the investment portion.) The total of all these expenses typically exceed 40% of each year's basic premium. VUL makes absolutely no sense as an investment vehicle nor as a life insurance protection vehicle for these and other reasons.
We can clearly see the 5% charge. The other charges are not listed as far as I can see (that doesn't mean that they aren't there).
Generally if you quit in the first year or two you will lose all, or virtually all, of your premium. Staying with the product is just throwing good money after bad.
Agreed
The only way you can benefit from this product is by dying fairly soon, so if you are in good health apply for new term insurance.
Yes, I am in good health and young so new insurance should't be a problem. The only complication is that I am a private pilot - interestingly the present VUL didn't exclude that! The pilot stuff isn't an insurmountable problem there are people that are out there that will cover private pilots.
After it is issued discontinue paying premiumiums on your VUL. Call the home office service number to see if there is any cash surrender value. If there is no cash value or it is small the best thing to do is just quit paying premiums, but "do not formally surrender the policy." Even with no cash surrender value these types of policies sometimes stay inforce for months or even a few years as you did not surrender it and occur the surrender charge.
Thanks - this is really helpful... I'd be interested to see what the implications were of stopping the premiums but not actually surrendering.

Great opinions - and you're all helping me reach the inevitable decision.

Cheers,

John.
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mephistophles
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JOHN: MORE ON PROSPECTUS AND OTHER ISSUES

Post by mephistophles »

The prospectus is an excellent source of information about all investments including the VUL you bought. Most people rarely read the prospectus but the rewards of doing so are well worth the effort. This applies to all equity investments, not just VUL.

I have a VUL prospectus in front of me from a major carrier. It comes in two parts. The main prospectus deals with the insurance contract itself and is required to be given to you. If you can't locate yours just call the company for a copy or read it online. The second prospectus is called a supplemental prospectus and you have to ask for it. It deals with the investment subaccounts.

I am now quoting from the primary prospectus. The index at the very front refers you to page 1 for a summary of expenses:

0% to 14% deducted from each premium depending on the state premium tax
$2 monthly administrative fee
.5% sales charge on premium paid monthly
50% contingent deferred sales charge upon lapse or surrender
$5 per thousand upon lapse or surrender

$15 fee for all withdrawals
$150 if living needs benefit is paiid
Cost of insurance deducted monthly
Mortality and Expense Risk Fees deducted daily
Fee for the face amount of the policy deducted monthly
Interest charges on any loans taken
Guaranteed death benefit fee
Fee for increase in face amount
Fees for any additional riders
All of the above fees and charges are further explained further back in the prospectus

Now, from the supplemental prospectus table of contents directs to Fees and expense tables. The annualized expense to manage subaccounts ranges from .37% to .90%

And now for the good part. Whatever money is left over is invested in a tax deferred account which is income tax free to your beneficiary upon death. Yeah....right!

On the other issues, don't beat yourself up over this VUL. There are no good ones that I have seen.

As for being a pilot, different insurance companies rate differently depending on the details of your flying. You may not be rated at all.

Regards,

ole meph
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Post by mickeyd »

Hey John,

Sounds like you've gotten yourself into a financial pickle. You have finally received good advice here, though a bit late.

Here's a few ideas~

1. Ask the agent if you can reduce the face amount (the amount of LI) to the minimum that they allow. For example if you have a $40,000 policy and they allow as low as a $25,000 policy. This will make your $10k already paid (and gone) last longer as LI.

2. Advise your agent that you will be replacing this VUL with term that will be bought from another agent.

3. Always remember that the first year commission on any LI product is a killer.
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matthewsjl
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Post by matthewsjl »

Thanks again to all.

I found the prospectus and it does list the charges. The other prospectus I had was the glossy marketing prospectus. We deifnately trusted too much on this one. I'm very lucky that this mistake, while expensive, is a relatively small portion of our total assets. Plus it's better to be out now than a few years down the line.
Whatever money is left over is invested in a tax deferred account which is income tax free to your beneficiary upon death. Yeah....right!
I think this was one of the reasons the VUL seemed attractive. Is this not the case about the tax free benefit?

Cheers,

John.
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Post by Barry Barnitz »

matthewsjl wrote:Thanks again to all.

I found the prospectus and it does list the charges. The other prospectus I had was the glossy marketing prospectus. We deifnately trusted too much on this one. I'm very lucky that this mistake, while expensive, is a relatively small portion of our total assets. Plus it's better to be out now than a few years down the line.
Whatever money is left over is invested in a tax deferred account which is income tax free to your beneficiary upon death. Yeah....right!
I think this was one of the reasons the VUL seemed attractive. Is this not the case about the tax free benefit?

Cheers,

John.
You might want to benchmark the price loadings of your current VUL with the direct to customer VUL offered by Ameritas.

First, a listing of customary VUL cost loadings:
What it costs

Second, Ameritas insurance cost loadings:
Ameritas Fees

Third, Vanguard subaccounts for VUL investment:
Subaccounts.
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mephistophles
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JOHN, YOU GOT IT

Post by mephistophles »

They skim a huge portion of your premium in various loads and what remains grows tax deferred and can be obtained income tax free at death.

Bottom line is that the tax benefits are very small relative to the huge expenses. Net result is that you lose a lot of money inorder to to make the insurance company rich.

And John, even though some may post that better VUL's steal less of your premium you remain the loser. "All" VULs are full of high expenses, that are paid by you, the consumer, which can never be regained, and are lost forever, in order to benefit others at your expense. VUL is just another form of so-called permanent or whole life insurance which ends up costing more, and guaranteeing less, than the old fashioned fixed whole life that intelligent investers, learned decades ago, was a scam to be avoided at all cost.

Just say no to anyone, anywhere, at any time, including posters on this forum, regardless of their position in the forum heirarchy.

Have a great day,

ole meph
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matthewsjl
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Post by matthewsjl »

Thanks for the explanation.

My first gripe with my advisor is that I was probably recommended a product that wasn't the most suitable. The second gripe is that within the VUL offerings, the one I ended up with wasn't the best offering in the market.

I've seen the light that the VUL I was sold wasn't the right investment. My wife and I failed to read and review everything presented and didn't appreciate the charges involved.

I'll be getting out one way or another this week and writing this off to an expensive learning experience.

Cheers - all the input to this thread has backed up my initial thoughts,

John.
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Post by johnoutk »

John,
On the old style bogleheads forum enter 49453 into the topic area and you'll get my post on VULs. It has a lengthy discussion. My wife and I dumped our policies after securing term insurance. (I had to wait 6+ months because of a health issue), but I suspended payments during that time. Let me know if you want any more info.

Regards,

John
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Post by White Coat Investor »

matthewsjl wrote:
I'll be getting out one way or another this week and writing this off to an expensive learning experience.
John.
Take your time. Don't rush anything. Yup, you got screwed (most of us here have at some point or another) but don't compound it with another mistake. Let this motivate you to read and learn both this forum and the recommended diehard books. Then, in a month or two, fix this mistake. The anger will have died down some and you'll have time to have lined up a good term policy. I also have a "rating" on one of my policies (for climbing). Be very careful to obtain new coverage at an acceptable price before ditching your old coverage.
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matthewsjl
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Post by matthewsjl »

The problem is that we'll be out another $3k if we wait another two months (and the surrender charge will eat that money going in). Stopping right now is the only way not to lose more cash.

I've been reviewing term life options today and have found coverage at reasonable rates (including stuff that covers my flying).

Cheers,

John.
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Post by tfb »

The insurance policy part is also coming out of that $800 at $77/month.
I'm going to guess that you will find that term life for the same amount of coverage costs substantially less than $77/month. That "cost of insurance" is also padded. True?
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matthewsjl
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Post by matthewsjl »

Actually it doesn't seem that way. My pilot stuff complicates things and the best quote I've had to date is $93/month. I've seen as low as $66/month without the pilot stuff included.

Still searching - but I'm sure I'll end up less than the current policy when all the fees are considered.

John.
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Post by Valuethinker »

matthewsjl wrote:The problem is that we'll be out another $3k if we wait another two months (and the surrender charge will eat that money going in). Stopping right now is the only way not to lose more cash.

I've been reviewing term life options today and have found coverage at reasonable rates (including stuff that covers my flying).

Cheers,

John.
Emergency Doc's point about not terminating your old coverage until your new coverage is firmly in place (first premium payment paid and accepted) is absolutely key!
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matthewsjl
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Post by matthewsjl »

Absolutely - but thesooner is the better in my case as the surrender charge eats whatever money I'm throwing at it right now. I will get the term insurance in place before cancelling though...

Cheers to all,

John.
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Post by johnoutk »

Call up and ask. You can stop dumping money in for awhile usually. (Or at least at a decreased rate.), and still have the insurance. Start the process of getting term now.
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Re: JOHN, YOU GOT IT

Post by RiskAverse »

mephistophles wrote:VUL is just another form of so-called permanent or whole life insurance which ends up costing more, and guaranteeing less, than the old fashioned fixed whole life that intelligent investers, learned decades ago, was a scam to be avoided at all cost.
And why was the old fashioned level premium Whole Life a bad choice? My understanding was that it was the best choice in life insurance, with the real scam being "buy term and invest the diference" a la Primerica.
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mephistophles
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FOR RISK AVERSE

Post by mephistophles »

IMHO the old fashioned fixed premium, participating whole life insurance was better than VUL for a few simple reasons. Traditional Whole Life had a guaranteed premium and a guaranteed lifetime death benefit. VUL has neither. That being said, term insurance with good mutual companies was a much better choice for the vast majority of the marketplace (estate planning and some business insurance being the exception.)

The problem with traditional whole life was that the premium was so high that few people could afford to pay for enough insurance to protect their families Only term insurance could fill the needs at affordable costs.

Primerica (formerly A.L. Williams Insurance) and their ilk popularized the so-called buy term, invest the rest argument. The problem was, their term was among the most expensive on the market, was typically sold with an additional front end load (called deposit term) and their investment consisted of a crummy fixed annual premium deferred annuity with high surrender charges. Their scam was to steal the money already invested in whole life insurance. The client went from the frying pan to the fire.

Regards,

ole meph
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Post by mickeyd »

The client went from the frying pan to the fire.
I agree with this statement that Mr Meph said and all that proceeded that sentance.
:!:

Term insurance from a good company is the most cost effective way to have LI. Anything else that is added (cash value, various riders of questionable value, investment options (VUL), interest sensative options etc.) all do a wonderful job of increasing the cash position of the agent, but very little for the poor insured or his/her family.
Last edited by mickeyd on Thu Jun 21, 2007 3:02 pm, edited 2 times in total.
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mephistophles
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HI MICKEY

Post by mephistophles »

What would you do with the younger women, whiskey and other items if you got them :P

Regards,

ole meph
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Post by jddphd »

johnoutk wrote:John,
On the old style bogleheads forum enter 49453 into the topic area and you'll get my post on VULs. It has a lengthy discussion. My wife and I dumped our policies after securing term insurance. (I had to wait 6+ months because of a health issue), but I suspended payments during that time. Let me know if you want any more info.

Regards,

John
Hi John -

I also had a thread on the VG Diehards forum on M*.

I went through the same thing you are going through, though I was able to stop the process before I actually sunk money into it.

I set up a couple of pages on my site about my experience in an effort to try to at least help people find articles/links that were more balanced.

I can't post the link as I am a new member on this forum, but if you go to the Morningstar site you can find it in original thread 53662. I think the new thread number is 183623.

In my view VUL policies are totally inconsistent with the Diehard philosophy.

best of luck
- JD
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